Difference Between Credit Card and Credit Line

Understanding the differences between a credit card and a credit line is crucial when managing your finances. Although both offer you borrowing options, they are entirely different in terms of features.

Here we will explore the differences between these two financial products in detail, so you know which suits your needs better.

What is a Credit Card?

A credit card is a revolving credit account that allows you to borrow money to make purchases, pay for services, or withdraw cash up to a certain limit. Each month, you receive a statement showing the amount you owe and the minimum payment due.

Imagine you have a credit card with a credit limit of Rs.1 Lakh. You use it to purchase a new laptop worth Rs.50,000. If you pay off the Rs. 50,000 before the billing cycle ends, you avoid paying any interest.

Additionally, you might earn cashback rewards on your purchase.

Key Features

• Interest Rates: Credit cards typically have higher interest rates than personal lines of credit.
• Rewards and Benefits: Many credit cards offer rewards like cashback, travel points, or discounts.
• Grace Period: Interest usually doesn’t accrue if you pay your balance in full each month.
• Accessibility: Easier to qualify for, with various options available for different credit scores.

Pros

1. Convenience: Widely accepted for both online and in-store purchases.
2. Rewards: Earn points, miles, or cashback on purchases.
3. Credit Building: Helps build your credit score when used responsibly.
4. Short-term Borrowing: Ideal for short-term financing needs.

Cons

1. High Interest Rates: Can lead to significant debt if balances aren’t paid off monthly.
2. Fees: Potential fees include annual fees, late payment fees, and foreign transaction fees.

What is a Credit Line?

A credit line, or a line of credit, is a flexible loan you can withdraw from a bank or a financial institution. It usually comes with a particular credit limit from where you can draw the loan as and when needed, repay, and withdraw again.

Now, consider you have a personal line of credit with a limit of Rs.1 Lakh. You use Rs.50,000 for a home improvement project. Interest starts accruing immediately on the Rs.50,000, but the rate is lower than your credit card’s interest rate.

You repay the Rs.50,000 over several months, and as you pay it down, you can borrow again up to the Rs.1 Lakh limit.

Key Features

• Interest Rates: Typically lower than those on credit cards, especially if secured by collateral.
• Usage: Often used for larger, ongoing expenses like home renovations or business operations.
• Draw and Repayment Periods: Specific periods during which you can borrow and repay the loan.
• Collateral: Some lines of credit, like a home equity line of credit (HELOC), may require collateral.

Pros

1. Lower Interest Rates: Interest rates are generally lower than those of credit cards.
2. Flexible Access to Funds: Draw and repay as needed.
3. Higher Limits: Often have higher credit limits compared to credit cards.
4. Cost-effective for Cash Withdrawals: No cash advance fees typically.

Cons

1. Stricter Eligibility Requirements: Harder to qualify for, usually requiring good to excellent credit.
2. Potential Fees: May include annual fees, transaction fees, and maintenance fees.
3. Interest Accrues Immediately: Interest starts accruing as soon as you draw from the line of credit.

Key Differences Between Credit Card and Credit Line

Now that we’re aware of what these financial products are, let’s understand how they are different from each other.

Features	Credit Card	Credit Line
Eligibility and Application Process	Easier with instant approval processes for a range of credit scores.	Often more stringent approval processes,i.e., they require better credit scores and sometimes collateral.
Borrower Qualifications	Having an existing account with the card issuer is optional. A good credit score is sufficient.	There must be a checking account with the lending bank or credit union.
Usage and Flexibility	Best for everyday purchases like groceries, apparel, household items, online shopping, debt consolidation through fund transfers, and short-term borrowing.   Consider using it if you can pay off your bills monthly to avoid high interest.	Ideal for long, ongoing expenses and cash withdrawals for home renovation projects, marriage, vacation, moving expenses, and debt consolidation.   Consider using it if you need access to a lot of funds continually.
Credit Limit Access	Credit cards allow credit limit access by swiping, tapping, or dipping the card. They also allow virtual cards and other options like ATM usage.	Credit lines can be accessed via cheques, bank transfers, cards, and UPI.
Repayment Terms	Monthly payment with minimum payment requirement. Includes interest-free period for full balance payment.	Flexible repayment terms during the draw period followed by monthly structured payments.
Interest and Fees	Higher interest rates and multiple fees like – late payment fees, cash withdrawal fees, maintenance fees, forex fees, etc.	Lower interest rates and only transaction fees and processing fees are required.
Benefits	Rewards programs with perks like cashback, discounts, travel points, airline miles, etc. With business credit cards, you get a responsible way to track and manage expenses. Responsible usage builds a good credit score which improves the chances of getting loans and other credit products in the future. With credit cards, you can implement special features like spending limits, domestic and international transaction limits, etc.	Typically lower interest rates make them cost-effective options for borrowing large sums of money. Interest is only charged on the amount borrowed, not the entire credit limit. Higher credit limits make it suitable for substantial expenses like home renovation, business needs, etc. Lenders do not charge any additional pre-closure fee if you decide to pay the outstanding balance or close the credit line before the agreed-upon tenure.

Related Article: Credit Card VS Debit Card

A Credit Card or Credit Line – Which is Better for You?

If you have short-term borrowing needs for everyday expenses like online shopping or grocery purchases, then credit cards are ideal. They offer multiple reward programs like cashback, discounts, travel points, etc. which aren’t available for the same purchases with debit cards.

However, the interest rates are steep and you must consider paying the outstanding balance within the billing cycle to avoid incurring excess interest.

On the other hand, if you have a long and ongoing need for cash or credit due to a project like home renovation or moving base, a credit line will be your best bet. The interest rates are less and only charged on the amount you withdraw at a time.

Conclusion

Both credit cards and credit lines are flexible options for you to borrow money. But they have their unique features, pros, and cons.

So, before you decide on using one, carefully analyze the interest rates, fees, repayment, eligibility criteria, etc. This will help you choose the option that’s right for your unique needs and specific situation.